Depending on the month, day, hour, or minute you test the information, you would possibly assume investing in cryptocurrency or being paid in cryptocurrency is the greatest idea since sliced bread or the worst possible use of your money, ever. Whether you agree with Warren Buffett that cryptocurrency has “no value” or assume Bitcoin’s worth will rise to $300,000 in 2022, there’s one factor about cryptocurrency that isn’t up for debate: getting it proper on tax returns has by no means been extra essential.
The IRS is aggressively working to establish and root out United States taxpayers who’re required to report cryptocurrency transactions, however both incorrectly report or omit cryptocurrency fully from their tax returns. Understanding the tax implications of shopping for, promoting, exchanging, or incomes cryptocurrency has by no means been extra necessary. We’ve recognized ten widespread errors made when reporting (or not reporting) cryptocurrency transactions to the Internal Revenue Service, and can element keep away from every mistake in its personal article. Finally, we are going to finish the Top 10 Crypto Tax Mistakes To Avoid sequence with ideas for the IRS on higher attain out to taxpayers who’re making Crypto Tax Mistakes, and deliver these taxpayers again into compliance. As a tax litigator, it’s my job to Monday-Morning Quarterback how taxpayers and their tax professionals did the primary time round. This sequence goals to assist people get it proper from the start, or establish doable errors that will should be addressed.
Number 10: Improperly Reporting Cryptocurrency Received From Air-drops, Forks, and Splits
“Air-drops, forks, and splits” could also be international phrases to rookie cryptocurrency buyers, however it’s necessary for anybody even dabbling on this space to change into shortly conversant in them as they’ve tax implications. Revenue Ruling 2019-24 particularly addresses these thorny points, and we are going to make it easier to work by way of the complexities of those occasions and the way they impression your tax reporting necessities.
Number 9: Failing to Report Crypto-to-Crypto Transactions
It is widespread for crypto buyers to change one cryptocurrency for an additional in a coin-to-coin transaction. It’s necessary to grasp these are taxable occasions and the way they need to be reported.
Number 8: Using the Wrong Form to Report Cryptocurrency Transactions
Are you being paid in cryptocurrency? Did you change a automotive for crypto or vise versa? Are you merely investing in crypto? Are you mining crypto? Each considered one of these potential transactions could require a unique IRS kind to precisely report the transaction and calculate the tax penalties.
Number 7: Improperly Reporting Cryptocurrency Received as Earned Income
Cryptocurrency obtained in change for performing providers just isn’t taxed the identical because the sale of cryptocurrency held for funding. We will discover and clarify correct tax remedy of cryptocurrency as earnings.
Number 6: Failing to Report Cryptocurrency Exchanged for Goods and Services
Thinking of paying to your new out of doors furnishings from overstock.com in Bitcoin? As an increasing number of retailers settle for cryptocurrency, taxpayers want to grasp the tax implications and reporting necessities related to paying in crypto.
Number 5: Failure to Prepare and Maintain Adequate (or any!) Records Reflecting Crypto Transactions
As with any taxable sale or change of property, taxpayers should be capable to set up foundation in an asset, together with cryptocurrency, with a view to calculate the achieve or loss and ensuing tax due. Taxpayers who don’t hold good data could discover themselves paying tax on the sale of crypto as if they’d no foundation in any respect within the asset. Taxpayers ought to resist the urge to be lulled into laziness and assume all data will probably be accessible electronically come tax time.
Number 4: Failure to Properly Calculate Cryptocurrency Gains and Losses
Did you lose cash on cryptocurrency? Losses can and must be reported to the IRS similar to positive factors, and losses could utterly offset any tax penalties of positive factors. But in the event that they do, taxpayers nonetheless have to report the transactions. Cryptocurrency buyers usually are not uniquely required to solely report and pay taxes on positive factors, and will embody losses and positive factors when calculating tax due.
Number 3: Using Like-kind Exchanges to Report Crypto
In all equity, this isn’t actually one thing that I’ve seen any of my purchasers do. But as a result of crypto held as funding is required to be reported as property, it is sensible that crypto exchanges for property, like a Tesla or exchanging Bitcoin for Ethereum ought to qualify for a like-kind change beneath section 1031 of the Internal Revenue Code. Unfortunately, it doesn’t.
Number 2: Failure to Take Proper Steps to Pass on Your Cryptocurrency within the Event of Your Death or Disability
Do your family members know entry your cryptocurrency accounts? If you die or change into disabled, the worth of your cryptocurrency could be included in your taxable property, even when your family members can’t really entry or unlock the worth of that asset. We will discover finest practices for a way to make sure your family members usually are not left cleansing up your crypto mess with none entry to the worth of the asset.
Number 1: Failure to Report Cryptocurrency at All
By far the worst error – whether or not intentional or unintentional – taxpayers make in relation to taxes and cryptocurrency is failure to report crypto transactions in any respect. Carolyn Schenk, the National Fraud Counsel & Assistance Division Counsel for IRS Office of Chief Counsel put it this manner when addressing crypto buyers who usually are not reporting earnings, “We see you.”
Putting all of it Together
Since I’m not the Commissioner of the Internal Revenue Service, I don’t get to resolve how the IRS goes to deal with growing and bettering outreach to taxpayers who must be reporting cryptocurrency transactions on their tax returns, and I don’t get to resolve how the IRS goes to deliver these taxpayers into compliance. But as a tax litigator, I’ve lots of concepts on how I believe the IRS must be engaging in these targets. We will end our sequence with a detailed have a look at how the IRS has been dealing with outreach and enforcement thus far, and what we’d prefer to see sooner or later.